Deferred Tax Liability or Asset = Temporary Difference × Currently Enacted Tax Rate Effective in the Year(s) the Temporary Difference Reverses
Calculations are not based on anticipated legislation that would alter the company’s tax rate. When enacted tax rates differ between years:
Existing tax laws may call for enacted tax rates to be different in future years in which a temporary difference is expected to reverse
Specific tax rates of each future year are multiplied by the amounts reversing in each of those years
When tax rates change, any existing tax liability or asset must be adjusted to reflect the change
A deferred tax liability or asset reflects the amount to be paid or recovered in the future
The deferred tax liability or asset should change if legislation changes that amount
Effect is reflected in operating income in the year the change is enacted
The change affects the amount that should be in the ending balance of the deferred tax asset or liability
The change affects the adjustment necessary to reach that balance
The change affects income tax expense in that year
In late December of 2017, Congress revised the federal tax rate, dropping it from 35% to 21% starting in 2018.
No change in tax payable for companies in 2017 because that amount was calculated using the old 35% rate.
The change did affect the value of companies’ deferred tax assets and liabilities, and adjusting those accounts in turn affected each company’s 2017 tax expense for the entire year.
Example
The decrease in federal tax rates enacted in late 2017 caused:
Citigroup to decrease earnings by $22.6 billion in the fourth quarter of 2017 as it reduced the carrying value of its large net deferred tax asset.
Verizon to increase earnings by $16.8 billion in the fourth quarter of 2017 as it reduced the carrying value of its large net deferred tax liability.
Use the same approach for multiple temporary differences. All temporary differences are categorized according to whether they create:
Future taxable amounts: The total of the future taxable amounts then is multiplied by future tax rate(s) to determine the appropriate balance for the deferred tax liability.
Future deductible amounts: The total of the future deductible amounts is multiplied by future tax rate(s) to determine the appropriate balance for the deferred tax asset.